Thursday, December 16, 2004

Cocktail Party Ammunition: Social Security

(In Understandable English, with jokes and pictures of naked women!)

Okay, I’m lying about the naked women. And probably about the understandable. Now on to business:

Lately we’re hearing a lot about the “crisis” in Social Security. Since this is probably going to be a big topic of political conversation at your better cocktail parties, I figured a primer may be helpful for the many of us who have better things to do with our time than research social insurance programs. Well, the many of you.

HistorySocial Security was started by FDR during the Depression, when basically everybody lost their life savings. Losing everything is awful when you’re 25 and can work for food, but it’s downright lethal when you’re 70 and can’t. Republicans strongly opposed Social Security for a lot of reasons. None of their reasons was that they wanted to help starving old people--basically, all their arguments were about communism and why letting old people starve was somehow an integral part of making America strong and prosperous.

In the roughly 70 years since Social Security was started, people have been ranting that it’s going to be the death of America, either by going bankrupt or through some other insidious trick. And it’s pretty much not been doing either of those things. And also, it’s widely agreed, even among those interested in reforming the program, that it’s been fantastically successful in achieving its goals of reducing poverty and creating a safety net.

Financing (This is the hard part. A cold beer aids comprehension.)Most government programs are funded by general revenues. This is like the money you get from your job, which you use to pay all the bills that come in. Social Security, on the other hand, is funded by a special dedicated tax, the payroll tax. This is like deciding you want to pay for your kids’ private school, so you take a second job and you put all the money you make in your second job towards your kids’ school.

All About the Payroll TaxThe payroll tax is a totally evil tax. While general revenue includes taxes on all kinds of stuff, like investment income and corporate profits, the payroll tax only taxes work, and it only really taxes the work done by the middle class. If you’re Paris Hilton, making a million dollars from your trust fund, you/re not on anyone’s payroll, so you don’t pay the payroll tax. Nice life, Paris. But if you actually earn money by doing real work (even if you’re self-employed), then you pay the payroll tax. It’s no joke—6.2% of your pay if you work for someone else, and 12.2% if you own your own business (it’s that “FICA” thing on your paycheck).

And another evil thing about the payroll tax? It only taxes the first $88,000 you earn. So, a CEO making fifteen million dollars a year pays a payroll tax of about $5,500, and his secretary making 90 grand pays the exact same $5,500. So while trust fund babies don’t pay this tax and rich CEOs barely notice it, it takes a huge chunk out of the paychecks of people who actually work for a living. This is why it’s evil.

What’s all this about trust funds and crises? I remember a lockbox…Right now, the payroll tax is like a really great second job—it’s paying more money than you need to send the kids to school. So, the question is what should you do with the extra money? Some people would think, “Hey, the kids are going to college eventually, so let’s put this money in the bank (or a lockbox!).” Other people would think, “Hey, let’s lend the money to my shiftless ex-husband who swears he’ll pay me back.” The Social Security Trust Fund gave the money to the ex-husband. It’s not their fault--Congress made ‘em do it.

For decades, the Trust Fund has been giving its extra cash (its surplus) to the federal government in exchange for IOUs in the form of Treasury Bonds. These are just like the Treasury Bonds your grandmother used to give you at Christmas. The Social Security trust fund is jam-packed with these Treasury Bonds. They’re tripping over ‘em on their way to the tree. It’s pandemonium!

Screw trees, what about this crisis? Well, here’s the crisis: in 10 years or so, the number of elderly is increasing—in other words, the kids are going to college. The second job (ie, the payroll tax) will still pay most of the tuition, but it won’t pay the whole thing with money left over anymore. This really isn’t a crisis, though, because we’ve got all those Treasury bonds from our shiftless ex-husband, right?

Ah, there’s the crisis. That deficit they keep talking about? That’s all the money your ex-husband is running up on his credit cards to buy stuff for his rich friends. All the money you lent him, he spent. He spent it on stuff like Iraq and a Medicare drug benefit and tax cuts for the rich.

So the crisis isn’t Social Security. It’s that the Federal Government is acting like a deadbeat ex-husband, and the Bush Administration is saying that since the payroll tax (your second job) doesn’t cover the full cost of Social Security benefits (your kids’ entire tuition), then you’ve got a problem. But wait, it’s not your problem, it’s HIS problem! You both knew this day was coming, and when you lent him the money, he promised he’d give it back starting around now! You’ve got the Treasury Bonds to prove it!

So what should you do?

Possible SolutionsThe best solution is to tell your shiftless ex to repeal his stupid tax cuts for his rich friends and pay you back the money he owes you! This isn’t just an analogy-- Bush financed his tax cuts for the wealthy by borrowing the Social Security surplus. If he doesn’t pay it back, that means rich people just partied with money that was earned by people who work for a living! So, this is the most obvious solution, it’s the most moral one, it’s the most fiscally responsible one. Still, how likely do you think Bush is to repeal tax cuts for the wealthy to pay back the money he borrowed from working folks? Yeah, not very. So, the best solution now is to table discussion until we get a fiscally responsible person back in office. Remember the Clinton surplus? We’ll do it again, and this time we'll use it to pay our debts.

There are some other solutions which all boil down to cutting benefits, either financially or by raising the retirement age. These are mostly crappy solutions. Okay, that’s an exaggeration—cutting benefits for rich elderly people is not entirely crappy, as they’re not going to be stuck eating dog food. But across the board cuts that affect poor people are just immoral. You wouldn’t think it was OK for your kids to go to a worse school so your husband could throw a party for his rich friends, so why is it OK for Bush to cut benefits for retirees so he can keep his tax cuts for the wealthy?

Another possible solution to the projected future shortfall to raise the payroll tax. I think we can all agree that’s a bad idea. The last thing we need is a higher tax on work, to increase taxes on work so we can keep tax cuts for the wealthy? Wow, that's just sick and wrong.

Non-SolutionsAnd then there are the solutions that are really stupid if you’re trying to stabilize social security, but are really clever if you’re trying to dismantle it without admitting that’s what you’re doing. Private accounts tops this list.

Bush wants to borrow a trillion dollars and force people to privately invest it in the stock market with no guarantees on return. If they hit the jackpot, great; if not, then no Social Security for them! This forced gambling of Social Security in the stock market is deeply ironic, considering the program’s roots in the greatest stock market crash of all time. One can be opposed to this “borrow and privatize” scheme or support it on ideological grounds, arguing about who hates markets and whether or not benefits should be privatized or should be shared. But that argument just boils down to calling people communists and doesn’t really address the real issues.

First of all, their arguments don't make sense. Bush’s folks say stocks will give people way better returns than the current social security system. But when it comes down to crunching numbers, they use best case economic scenarios when they look at stocks, and worst case economic scenarios when they look at the current system. That’s just crazy. When the economy sucks, stocks tend to suck too, and vice versa. So you can’t simultaneously project that 2042 will be the worst economic year ever when it comes to calculating returns under the current system and predict it’s going to be the best year ever when it comes to calculating stock returns! It’s like saying that next week, the temperature will be 90 degrees and it will also be snowing. It’s just nutty, and they’re hoping you’re not paying attention.

The more important thing is, we’ve got a system that’s worked for more than 60 years, and the entire time its opponents have claimed that it is going to fail and take America down with it. But even now in this time of supposedly terrible crisis, the worst case scenario is that between Treasury notes and payroll taxes, this program is fully funded through 2042! Given that we’ve already got a huge problem with the deficit because of Bush’s tax cuts, does the minor problem we think we’re going to face in 2042 justify taking on a trillion dollars in additional debt to finance an incredibly risky “Hail Mary” venture that, golly gee, might not even work?

Wait, are we suggesting that Social Security is perfect? Hell, no! Women, because they live longer and are in the workforce shorter than men, aren’t well supported by Social Security. Also, sometime near 2042 we might either have to slightly cut benefits (preferably for rich retirees) or slightly increase taxes (preferably not the evil payroll tax). But frankly, that’s a trifling concern for another day, a problem we may never have to face because things may be better than the worst-case scenario (as they often are).

Finally, this debate comes down to a question of credibility. Honest people know that there are far bigger problems than Social Security looming on the horizon. And there are far bigger problems today. Do we really believe that the people who have opposed Social Security from its inception are now so worried about its future that they’re putting everything else on the back burner to fix it? Perhaps it is more credible to believe that “fixing” Social Security is really not what private funds are all about—perhaps they are about in the short-term rewarding Wall Street and in the long-term making Social Security less something that people can count on (an entitlement) and more something they receive if they’re lucky enough to afford a good stockbroker (an investment).

2 Comments:

Anonymous said...

Thanks for the lesson. Seems to me that a reasonably simple fix would be to shift the payroll tax so that folks are taxed on, let's say, the first $88,000 of earned income AFTER the first $40,000. That way, the poorest don't pay much, and those who have a few extra bucks pitch in more heavily.

Of course, this coming from someone who would fall below that threshold. I expect that someone earning $128,000 a year might have a different opinion. That someone may also have better political connections than I do.

I like Taro's suggestion, although my guess is that if the first $40,000 were exempted, and the payroll tax rate (6.whatever %) were maintained), then the next $300,000 or so would have to be taxed -- not just the next $88,000.